Fiscal Reform for a Strong Tunisia: First STTA Report

The project is undertaking several case studies that will serve as reference material for the Ministry of Finance staff to update and refine its fiscal policy analysis capabilities. One of the key issues in considering changes in fiscal policy is who ultimately bears the burden of changes in fiscal policy, such as tax rate, tax structure, subsidies, and transfers. The purpose of this consultancy is to analyze the fiscal tax incidence from selected fiscal policy instruments used by the Government of Tunisia, including direct taxes, social contributions, and cash transfers. To carry out the mission, the Commitment to Equity (CEQ) Institute methodology developed by Tulane University in the United States was used. This methodology has several advantages, including being detailed, flexible, and easy to understand, and covering all types of fiscal interventions. The methodology was adapted to the Tunisian context using data from the Tunisian statistical institute INS and data from the Ministry of Finance. The methodology consisted of calculating changes in revenues taking into account cash transfers, social contributions, and income tax. Specifically, changes in market revenues, available revenues, net market revenue, and final revenue were estimated. The fiscal measures analyzed were determined to be progressive or regressive in nature. The direct transfers were found to be progressive, with the amount of cash transfer inversely decreasing proportionally with market income. Social security contributions and personal income tax were also found to be progressive, providing evidence that the burden of tax increase is proportional with market income. Concerning the distributional impact of direct tax and transfers, the net transfers were found to be positive for the first quintile, meaning that the actual transfer-tax system favors the lowest-income group. The new methodology takes into consideration the number of workers per household, going beyond research evaluation that focuses only on outputs concerning the current fiscal system in Tunisia. The planned future reforms concerning the different forms of interventions request a complete fiscal incidence analysis to be carried out in order to assess the poverty and distributional effects of taxes and transfers. The consultant recommends several next steps, including sharing the methodology and guidelines with the officials of the Ministry of Finance through capacity building programs, developing a microsimulation tool to examine different scenarios and their impacts concerning inequality and poverty, conducting a case study together with the officials of the Ministry of Finance that examines the distributional role of value added taxes, in-kind transfers, and indirect subsidies, and participating in the workshop planned by USAID to present the progress in the fiscal incidence analysis.